GM Deal to Absorb Chrysler Gains Speed

Although a GM-Chrysler combination would boast 8.1 million units of production capacity, or 40.9% of North America's total capacity, it's unlikely such a manufacturing mammoth would last long.

Momentum towards a deal to buy Chrysler LLC appears to be accelerating, as new signs add fuel to widespread speculation General Motors Corp. may soak up its cross-town rival.

GM reportedly is pushing for conclusion of an acquisition agreement by the end of October, although it continues to decline comment regarding the potential combination, which according to Ward's data would create, at least initially, an auto maker controlling 40.9% of North American vehicle production.

“There's a lot of speculation out there and we don't want to add to any of it,” GM spokesman Tom Wilkinson tells Ward's.

The struggling auto makers remain far apart in their negotiations, but GM continues to closely examine a takeover of Chrysler, The Wall Street Journal says, citing people familiar with the situation.

A high-ranking source within the supplier community also confirms to Ward's the deal remains alive, citing colleagues involved in drawing up an analysis of the takeover.

The Journal says lenders to GM and Chrysler are particularly keen to get a deal done, although some GM board members remain cool to the union. Meanwhile, Reuters reports GM and the Renault SA/Nissan Motor Co. Ltd. alliance, which on and off has been seeking a U.S. partner and already is collaborating with Chrysler on future trucks and passenger cars, may carve up the company between them.

Financing the deal, however, would seem the greatest hurdle. GM is cash-strapped, and with the credit crunch still throttling lending between financial institutions despite the massive government bailout, highly leveraged private-equity firms such as Chrysler parent Cerberus Capital Management LP are finding it tougher to do business.

“We face a big absence of debt at the moment, so private equity will have to be imaginative and flexible in deals,” says David Brophy, director of the Center for Venture Capital and Private Equity at the University of Michigan and a member of the board of GMAC LLC, GM's captive finance company owned 51.0% by Cerberus.

“One thing you can say is that in all of this turmoil we're going through, private equity will be the leader out of the mess,” he adds.

Signs pointing to an impending deal include reports Cerberus is moving closer toward obtaining the remaining 19.9% of Chrysler it does not presently own. Full ownership would make it easier for the private-equity group to dump Chrysler, just 17 months after gaining control of the 83-year-old auto maker from Daimler AG.

One chip in a GM-Cerberus deal for Chrysler would be GMAC. Reports last week suggested Cerberus was interested in swapping Chrysler for GM's remaining stake in GMAC, and it appears the two sides are playing out their negotiating hands.

This week, Cerberus placed a floor on consumer credit scores for loan applications at GMAC, a move that pinches financing options for GM dealers. GMAC cites a “lack of stability in the global capital and credit markets” as motivation for limiting loans to applicants with credit scores of 700 or above.

GM responded by pointing out to consumers there are other vehicle-financing options and reportedly incentivizing dealers to book sales through other lenders.

Wilkinson characterizes GM's moves as a friendly reminder to new-car shoppers and dealers. “We've been doing that for quite some time,” he says.

GM also appears ready to jettison its Hummer division, possibly paving the way for an acquisition of Chrysler's Jeep operations. This week it shifted Jim Taylor from general manager of Cadillac to CEO of Hummer.

Unlike Hummer, which became a lightning rod for environmentalists with its gas-guzzling H2 flagship model, Jeep is viewed by many as a more environmentally friendly brand.

“Jeep is the most valuable asset,” says Gerald Meyers, a U of M business professor and former chairman of American Motors Corp. Chrysler bought AMC for its Jeep brand in 1987, phasing out all other operations.

GM also moved this week to speed closure of some of its plants, adding more fuel to the takeover talk.

The capacity adjustments could be seen as an effort by the auto maker to quickly rationalize production before bulking up on Chrysler's manufacturing operations. Both auto makers already have far more capacity than needed in the current market climate, with Chrysler sitting on a bloated 84-day supply of vehicles at the end of September.

Although a GM-Chrysler combination would boast 8.1 million units of production capacity, it's unlikely such a manufacturing mammoth would last long.

Presuming GM long-term retained only Chrysler's Jeep operations and some minivan capacity and possibly pulled its rear-drive car platform into the fold, a combined GM-Chrysler ultimately would remove an additional 1.13 million to 1.39 million units in car and light-truck capacity from North America.

That would take industry capacity closer to 18.2 million vehicles, still well above actual production levels, which are expected to fall below 14 million units this year.

Currently, Chrysler has installed capacity in the U.S., Canada and Mexico for 3.2 million vehicles, Ward's data shows. But with its Newark, DE, Durango/Aspen facility set to close by 2010; its St. Louis minivan operation to be mothballed at year's end; and its Detroit Viper plant up for sale, the auto maker already has plans to shrink that to 2.8 million vehicles.

Its Jeep operations in Toledo and Detroit account for 665,000 of that total, according to Ward's data. Chrysler also builds Jeeps in its Belvidere, IL, plant (302,000 vehicles) and has capacity for 443,000 minivans at its plant in Windsor, ON, Canada.

A wild card in a GM acquisition might be Chrysler's operation in Brampton, ON, which can churn out up to 252,000 Chrysler 300 and Dodge Challenger and Charger cars per year. Adapting the Chrysler platform and utilizing the existing tooling to spin new models for GM's own brands could be an economical way for it to put some fullsize, rear-drive sedans in its showrooms, if escalating federal fuel-economy requirements would allow.

Swallowing those strategic pieces of Chrysler would balloon GM's capacity from 4.4 million vehicles today – adjusted for already announced planned plant closings and new facilities coming on stream – to 5.8 million-6.1 million units.

Without question, a massive downsizing of the auto makers' workforce would follow any combination.

“Oh, absolutely,” Canadian Auto Workers union President Ken Lewenza says of the potential for deep job cuts on both sides of the border. “The only reason (for the deal) is to eliminate competing interests in a very competitive market, and anytime that happens it's the worker who suffers. This is not in the best interest for workers at Chrysler or GM.

“The union has always been forceful in saying, 'You can't keep buying yourself out of this situation.' For the last six years, all the CAW has been dealing with is an attritional thought process. But we'll play with the cards we're dealt,” Lewenza tells Ward's.

“Feinberg gave us the comfort they were in this for the long haul,” he says. “Those were his exact words.”

Over the last two years alone, GM has shed more than 53,000 blue-collar jobs through attrition programs and natural retirements. Chrysler said last year it would like to trim 13,000 people from its blue-collar payroll in an effort to right-size the company.

Ward's estimates if GM were to jettison all Chrysler vehicle-making capacity except the Jeep and minivan plants, it would affect more than 11,000 workers. Chrysler employs another 19,000 in manufacturing jobs at parts operations throughout North America, according to Chrysler's website, many of which also would be affected by consolidation.

On the salaried side, Meyers tells Ward's a GM-Chrysler combination would lead to survival of the fittest.

“GM would find places for the good ones, which was the case with AMC,” he says. “When Chrysler bought AMC, the best people found good jobs and the others over time retired or went away.”

The picture is grimmer on the shop floor, where protests from the United Auto Workers union and CAW will not sway a takeover if GM gives the green light, Meyers says.

“In the final analysis, it won't make a difference what (organized labor) thinks because the market demands the restructuring of the industry,” Meyers says. “Sorry fellas, but your kids will have to find a job (somewhere else) besides the auto plant.”

A more rational avenue for Cerberus to rid itself of Chrysler would be to sell it to an overseas auto maker, some experts say.

“U.S. auto makers must reduce capacity,” says Michael Whitty, a professor of business administration at the University of Detroit-Mercy. “But a capacity shakeout is needed on a global scale. So this deal should be done on a global basis with great finesse.”

Meyers agrees, saying Chrysler's product, dealer network and manufacturing assets have most value to an offshore auto maker looking to enter the U.S.

“A Chinese company with access to all that sovereign cash could buy (Chrysler)…in order to establish a beachhead here in the U.S.,” he says. “That's the best answer for Chrysler. But it still leaves the overcapacity problem unanswered.”